Fairness in Taxation Act–A Bad Solution to a Phantom Problem

Do the rich pay their fair share in taxes? Rep. Janice Schakowsky [D-IL9] doesn’t think so. On March 16, 2011, Schakowsky introduced H.R. 1124 “to amend the Internal Revenue Code of 1986 to impose increased rates of tax with respect to taxpayers with more than $1,000,000 taxable income, and for other purposes.” The bill would make two significant amendments to the current tax laws.

First, the bill would significantly increase the top marginal tax rates for those earning $1 million a year or more. Currently, the federal tax brackets top out at 35%. Under the Fairness in Taxation Act, the top rate would rise to 49%:

$1-10 million: 45%

$10-20 million: 46%

$20-100 million: 47%

$100 million to $1 billion: 48%

$1 billion and over: 49%

Second, the bill would raise tax on capital gains and dividends for those making more than $1 million: “The bill would also tax capital gains and dividend income as ordinary income for those taxpayers with income over $1 million.”

According to Rep. Schakowsky, if enacted in 2011, the Fairness in Taxation Act would raise more than $78 billion (although over what period of time is unclear). While $78 billion is a lot of money, what’s startling is how little (relatively speaking) of an impact this measure would have on our country’s annual deficit and accumulated debt. To put $78 billion in perspective (and assuming it’s an annual figure), our projected deficit just for fiscal 2011 is $1.27 trillion.

Reaction to the bill has been polarized, to the surprise of absolutely nobody. Those in favor of the bill believe it’s time the rich pay their fair share. According to the Huffington Post:

“Currently, the top marginal tax rate of 35 percent applies to income starting at $373,650, and the tax code fails to distinguish between earners making a few hundred thousand dollars a year and those making a few hundred million dollars a year. “LeBron James and LeBron James’s dentist: same difference,” New Yorker financial columnist James Surowiecki quipped last year during early debate over the extension of the tax cuts enacted under former President George W. Bush.”

While the comparison of LeBron James to his dentist is amusing, it’s also highly misleading. True, they both have the same top marginal tax rate of 35% under current law. But LeBron James certainly pays many times more in taxes than does his dentist, or just about anybody else for that matter.

The fact is that the rich already pay the vast majority of personal income tax. For example, the top 5% of all tax payers pay about 60% of the total personal income tax.

The bill would have no affect on me, at least not directly. I’m sorry to say I don’t make $1 million a year or more. But shouldn’t the policy discussion move away from taxing the “rich” and toward a fair and effective approach to dealing with our fiscal crisis? Any solution certainly will involve more taxes for the rich. Regardless of what some politicians may promise, a workable solution also will involve more taxes for the middle class and fewer government benefits for most everybody.

But the Fairness in Taxation Act has nothing to do with the deficit. At least the deficit isn’t the motivating factor. The bill is all about wealth redistribution, pure and simple. According to Schakowsky,

“In the United States today, the richest 1 percent owns 34 percent of our nation’s wealth—that’s more than the entire bottom 90 percent who own just 29 percent of the country’s wealth. And the top one-hundredth of 1 percent now makes an average of $27 million per household per year. The average income for the bottom 90 percent of Americans? $31,244. It’s time for millionaires and billionaires to pay their fair share.”

But the question is, their fair share of what? Should the rich pay their fair share of a federal budget out of control? It’s politically “safe” to play the “tax the rich” card. But why don’t the politicians in Washington prove to us that they can tax and spend with a modicum of self-control, and then come to us with a proposal (including higher taxes) to tackle the national debt.

The problem isn’t the rich; the problem is Washington.

So what do you think? Should the rich pay up to 49% of their income in federal taxes while Washington continues to spend us into oblivion?

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

Brian Davissays:

March 23, 2011 at 9:25 am

One step further. A fair flat tax across the board eliminating loop holes, deductions, and the IRS!

I agree with Brian; a flat tax is the way to go. To be quite honest, we could make the top marginal rate 100% and it would not have a significant effect on what the rich pay in taxes. First of all, wage income is an insignificant part of their income. Secondly, even if you raise the tax rate on capital gains/dividends, they could just move their investments to a tax sheltered vehicle like municipal bonds. Sure, 7% might be the most they can get on their return, but when you are investing millions, that’s not a big deal.

Ever since the income tax was instituted in this country, top tier earners have consistantly paid 17-20% (yearly) of the taxes (based on gdp) in this country, and yet the top tier rate has varied from the low twenties to over ninety percent. They paid in the most when the GDP was growing the fastest. So in simple terms, if you want the rich to pay more, create an enviornment where there is a great deal of economic growth.

While I agree that we need to get rid of a lot of deductions and loopholes, I don’t think a flat tax is the answer. The problem is that a loaf of bread and a gallon of milk cost the same if you make $30,000/yr or if you make $3,000,000/yr. After the guy who makes $30,000/yr pays for food and his tax bill, there is nothing left. But the guy who makes $3,000,000/yr doesn’t even notice the dent it makes in his wealth. If you can change the price of groceries so that it is a percent of income, a flat tax might work.

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